Cap Rate Calculator
Calculate cap rate (NOI / Property Value) for an investment property from gross rents, vacancy, expenses, and price.
Typical market rate is 4-10%.
The capitalization rate (cap rate) is the most widely used metric for evaluating income-producing real estate. It measures the annual return a property generates relative to its current market value, independent of financing — allowing fair comparison between properties regardless of how they’re purchased.
Formula: Cap Rate = Net Operating Income (NOI) ÷ Current Property Value × 100 NOI = Gross Rental Income − Operating Expenses Property Value = NOI ÷ Cap Rate
What each variable means:
- Net Operating Income (NOI) — annual income after operating expenses but before mortgage payments, income taxes, and depreciation.
- Operating Expenses — property taxes, insurance, property management, maintenance/repairs, vacancy allowance, utilities paid by owner.
- Cap Rate — expressed as a percentage; higher cap rate = higher return but often higher risk.
What is NOT included in NOI: Mortgage principal, mortgage interest, income tax, capital expenditures (roof replacement, HVAC), and depreciation are excluded. NOI is a pre-financing metric.
Cap rate benchmarks by market type:
| Market Type | Typical Cap Rate |
|---|---|
| Top-tier urban (NYC, SF) | 3–4% |
| Major metro suburban | 4–6% |
| Mid-sized cities | 5–8% |
| Small towns / rural | 7–12% |
Worked example: Single-family rental home. Purchase price: $280,000. Annual gross rent: $24,000 ($2,000/month) Vacancy (8%): −$1,920 Property tax: −$3,200 | Insurance: −$1,100 | Management (8%): −$1,920 | Maintenance: −$1,500
NOI = $24,000 − $1,920 − $3,200 − $1,100 − $1,920 − $1,500 = $14,360 Cap Rate = $14,360 ÷ $280,000 × 100 = 5.13%
Using cap rate to value a property: If comparable properties in the area sell at a 6% cap rate, this property’s fair value = $14,360 ÷ 0.06 = $239,333 — suggesting the $280,000 asking price is above market.
Cap rate vs. cash-on-cash return: Cap rate ignores financing. Cash-on-cash return measures the return on actual cash invested (down payment + closing costs) after debt service — usually more relevant to leveraged investors.